Banking & Finance 2024 Comparisons

The Cypriot economy has continued to record a noteworthy growth, mainly driven by a faster than expected recovery in tourism-related activities and, to a lesser extent, by growth in information and communication activities and in professional services. In addition, the credit rating of Cyprus has also improved, which in turn has aided banks, financial institutions and private companies to raise capital, uphold strong capital positions and reduce the amount of non-performing loans (NPLs). In fact, the ratio of NPLs has declined from 44% in 2017 to 8,7% in June 2023. Since the 2013 banking crisis, the banking sector had to restructure the way it functions, by refining and strengthening its capital and investing in its corporate governance. All domestic banks have been under the supervision of the European Central Bank (ECB) and gone through various stringent assessments that have successfully created more robust and steady foundations.

A popular trend in the market has been the consolidation of businesses via mergers and acquisitions, including in the financial sector with larger banks acquiring smaller ones, whilst particular divisions handling the management of NPLs have improved lending conditions in general.

Reforms, New Laws and Current Trends

Reforms of the island’s legal and judicial structure include the new state scheme (ESTIA), which aims to support vulnerable borrowers who are encountering financial problems repaying their loans backed by their family home (main residence). In addition, the Ministry of Finance has proposed a new law on Credit Servicers and Credit Purchasers which is currently under public consultation. The new law would transpose EU Directive 2021/2167 (the “NPL Directive”) into national legislation. The NPL Directive regulates the sale, purchase and servicing of non-performing loans (NPLs) originated by EU banks. It aims to reduce the build-up of NPLs within EU banks, and does so by creating a framework to help foster a secondary market in NPLs, while ensuring this will not adversely affect borrowers.

This is an additional measure to the law passed in 2018, the Securitisation of Credit Facilities or Other Forms of Claims or Exposures Law (88(I)/2018) (the “Securitisation Law”) was passed, which enables a lender to refinance a set of loans, exposures or receivables by transforming them into tradeable securities accessible to investors. Its goal was to ease the minor loan market, and hopefully, ultimately, reduce the number of NPLs.

Despite the turmoil of the recent economic and geopolitical events, the Cyprus banking sector has shown resilience throughout 2023. In particular, it has maintained a high liquidity level, with its Liquidity Coverage Ratio standing at 318% in March 2023 and at the end of the second quarter of 2023, the Common Equity Tier 1 ratio was 18,9%. These statistics further prove that the Cyprus banking sector has built up capability to absorb any future shocks which changing times may bring.

It is worth noting that the ongoing impact of the Russia-Ukraine conflict does not appear to represent a threat to the domestic banking industry, as exposure of the Cypriot banking sector to the Russian market or sanctioned individuals is limited. In particular in 2023, Russian nationals accounted for only 0.8% of total loans and 4.7% of total deposits.

In contrast, the Israeli-Palestinian conflict may pose a direct credit risk to Cyprus given the fact that Cyprus is dependent on Israel for the supply of oil and gas. However, it is too soon to assess with certainty the impact of this conflict on Cyprus.

The issue of corporate bonds, other than to related parties, is not a common feature in Cyprus, at least outside the banking sector (eg, in June 2023 Bank of Cyprus issued EUR220 million Fixed Rate Reset Perpetual Additional Tier 1 (AT1) Capital Securities, and a concurrent cash tender offer to holders of its outstanding additional Tier 1 Capital securities). Having said this, the exposure to the high-yield market is likely to attract other large corporations keen to tap into it as a replacement to shareholder equity, bank or trade finance, which are the current financing tools used.

The search for financial channels outside the traditional finance system in Cyprus is showing tendencies for growth, with particular emphasis on credit arrangements via retailers promoting own arrangements or those of particular suppliers of goods or services and limited leasing schemes.

The provision of peer-to-peer financing or B2B is less straightforward, and the sector is restricted due to Central Bank of Cyprus (CBC) regulations and guidance that restrict non-banking or equivalent institution financing.

The Cypriot banking crisis of 2013 and the subsequent reforms in the banking sector, aimed at addressing the challenges facing the banking system, have resulted in the banks being very cautious towards new lending. In addition, the CBC, as aforesaid, has restricted the use of B2B or peer-to-peer financing from being processed via the banking sector. Banks now tend to seek to not only over-collateralise their exposure but to seek increasing levels of comfort regarding the underlying repayment ability. This in turn has meant that the application approval rate has fallen and there has been an increase in turnaround times (and corresponding overheads). The management and sale of NPLs has remained a topic of ongoing discussion in the market with some progress in respect of this.

Whilst the measures are meant to reassure investors, this has not been reflected in stock exchange pricing trends, with banking stocks continuing to fall.

Aside from this, as well as the increasing use of retail-sector financing, there has not been any other significant alteration in banking and finance techniques to date.

The emerging sector of environmental, social and governance (ESG) investments and interest in sustainable lending is a trending topic, albeit one that does not seem to be a primary driver for or element in investments in Cyprus yet (even if all or some of the aforesaid elements are part of a review of a prospective investment). Having said this, there is a build-up of momentum due to the EU Sustainable Finance Disclosure Regulation 2019/2088 (SFDR), which came into effect in 2021, and the EU Non-Financial Reporting Directive 2014/95/EU (NFRD) of 2018.

The SFDR has imposed harmonised transparency and disclosure requirements on financial market participants and financial advisers and entails companies within that ambit contemplating how sustainability risks are merged into the investment decision-making process as well as how remunerations are aligned with a company’s sustainability matters. Therefore, the SFDR affects a majority of the financial services industry in Cyprus. The Cyprus Securities and Exchange Commission (CySEC) has confirmed that supervised entities need to fully comply with the SFDR disclosure obligations and with their ESG commitments, as they will be closely monitored.

In addition, the NFRD requires companies to include non-financial statements in their annual reports, including information on environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards. The NFRD applies to public-interest companies with more than 500 employers in the EU.

Moreover, CySEC has reinstated its mission to nurture compliance with sustainable finance standards.

As a result, the discussion around ESG in Cyprus has increased significantly, with the financial regulators, financial services organisations, banks and investment funds preparing to conform with the above EU directives, in addition to applying effective procedures, but such interest is primarily limited to larger (mostly listed) companies and banks.

As an example, one of the larger local banks has already received an “A” rating from the Morgan Stanley Capital International (MSCI), the global benchmark on ESG.

The industries/sectors which are moving faster towards sustainability appear to be the ones which comprise of regulated entities such as banking, insurance companies and funds. In recent times, however, privately held companies have joined the movement towards ESG performance.

Under the Business of Credit Institutions Law of 1997 (66(I)/1997), as amended (the “Credit Business Law”), banks require a licence to conduct banking services.

The application for obtaining a banking licence should be made in writing by or on behalf of the applicant to the Central Bank of Cyprus (CBC) and no application fee is payable. Such application form must be accompanied by a business plan describing the types of activities envisioned and the organisational framework intended. In addition, relevant questionnaires which are issued by the CBC for the licensing of banks in the Republic of Cyprus need to be appropriately filled in and in general the CBC can request additional details prior to deciding whether to approve the application.

In order to be granted a banking business licence, the applicant must be either a legal person set up in Cyprus under the Companies Law, Chapter 113 (the “Companies Law”) as amended, or a credit institution established and approved in its relevant country. If the applicant is not an existing EU credit institution, it must have initial capital of at least EUR5 million (meeting the capital requirements as set out in EU Regulation 575/2013 on prudential requirements for credit institutions and investment firms), although there may be specific situations where the CBC will consider allowing for a smaller initial capital).

Although the process is managed by the CBC, the ultimate decision-making powers on whether to grant relevant authorisation vest with the ECB.

EU Credit Institutions and Non-banks

The aforementioned criteria do not apply to EU credit institutions wishing to establish a branch in Cyprus, since credit institutions licensed by competent authorities of another EU member state may, under the provisions of Section 10A of the Credit Business Law, establish a branch in Cyprus without the need to obtain a banking business licence from the CBC.

With regard to non-banks, the Investment Services and the Exercise of Investment Activities, the operation of Regulated Markets Law and other related matters (87(I)/2017), as amended, provides guidance as to the corporations and institutions capable of providing financial services. Such non-banks include any licensed Cyprus Investment Firms (CIFs), which require the prior approval and authorisation of CySEC. The requirements for a CIF depend on the specific type of investment and financial services provided by such company.

An investment firm originating from another member state or a third country is able to provide such services in Cyprus through its branch, provided it is authorised and overseen by a competent authority in that member state or third country and it complies with all the disclosure requirements of CySEC.

Finally, it is noted that private lending (eg, peer-to-peer or similar) or cross-border lending does not fall within the above framework, but under general principles of commercial law.

Foreign lenders are not restricted from granting loans provided doing so is compliant with the laws of their own jurisdiction and this does not amount to doing business in Cyprus as a financial institution (ie, falls under the definition of offering banking services). The latter generally means retail banking, as opposed to the provision of one-off financing.

Borrowers are not restricted from granting security over any type of property, or guarantees to foreign lenders, nor providing from foreign subsidiaries of the borrower, provided there are no such restrictions in their constituent documents, the Companies Law or other provisions (such as AML regulations).

There are no foreign currency exchange controls or restrictions as Cyprus is a euro area member state. Local borrowers are not restricted from borrowing in any foreign currency. Temporary restrictive measures were only imposed under the Enforcement of Restrictive Measures on Transactions in case of Emergency Law (12(I)/2013) for a limited period of time. Further, the Movement of Capital Law (115(I)/2003) ensures that there are no restrictions on the movement of capital, including payments to and from residents of Cyprus and residents of the EU or third countries. See 3.4 Restrictions on the Borrower’s Use of Proceeds.

Obviously, the proceeds must be used for legitimate purposes and subject to any restrictions imposed by the financing documents themselves. The effect of a borrower acting contrary to the approved purpose may, depending on the circumstances, cause the contract to be void by reason of the objects being unlawful in part, or voidable at the option of the lender whose consent was caused by fraud or misrepresentation, under the Cyprus Contract Law, Chapter 149 (the “Contract Law”). In addition, the use of such proceeds must always comply with the scope of activities of the borrower as these are stated in its memorandum of association, and must comply with general principles of contract law as well as specific restrictions/prohibitions that may exist under relevant applicable law.

Further, Cyprus is a full member of the European Union and the United Nations, and applies, enforces and implements any international sanctions by a relevant decision or resolution adopted by the UN Security Council, and restrictive measures adopted by the Council of the EU via relevant decisions and regulations, within the framework of Common Foreign and Security Policy. Therefore, for example, the use of proceeds to make or be part of any arrangement to provide loans or credit to, or enter into any transactions or dealings with certain financial instruments with any legal person, entity or body on any such sanctions list (or any legal person, entity or body majority-owned by such sanctioned person, or acting on behalf of such sanctioned person) is prohibited.

Both the agent and trust concepts are recognised in Cyprus. Agency law is generally governed by several pieces of legislation, including Sections 142–198 of the Contract Law, which ultimately mirror English common law.

Likewise, trusts are of common law application and the relevant domestic law is the Trustees Law, Chapter 193, as amended, and the International Trusts Law of 1992 (69(I)/1992), as amended. The general idea of a trust is that it creates a fiduciary relationship where the trustee holds title to a property for the benefit of a third party. Thus, a trust can also be used to hold security over the possessions of debtors on behalf of creditors.

An alternative concept, which falls between the two and is commonly used in financing/banking as well as commercial transactions, is that of the escrow agent, whereby the escrow agent assumes the role of both a trustee and an agent for both parties, in order to facilitate the conclusion of a transaction.

There is no statutory mechanism for loan transfers. The loan documentation will usually provide that the lender may freely assign its rights and obligations to a new lender; the borrower will not usually be allowed to novate its obligations without the prior express or written consent of the lender.

With respect to securities granted to the original lender, these may be either released with the simultaneous execution of termination agreements with respect to the existing security agreements between the borrower and the original lender, and the new security agreements between the borrower and the new lender as secured party (or a tripartite agreement between the borrower, the original lender and the new lender), or transferred without release in favour of the new lender. The process is regulated by general principles of law and the Contract Law.

There are no general statutory restrictions on debt buyback by the borrower or sponsor; it is a matter of commercial terms (existence or negotiation) and capacity under the constituent documents of the parties involved. There may be instances of specific restrictions (such as when the buyback by an affiliate amounts to financial assistance) and therefore each case needs to be examined on its particular facts.

With respect to public takeover bids pursuant to the Public Takeover Bids Law (41 (I)/2007), as amended, for the acquisition of securities of companies (or a squeeze-out or a sell-out) it is possible to offer securities, cash or a combination of both. The consideration must be equal to at least the highest price paid or agreed to be paid for the same securities by the offeror, within 12 months before the bid announcement.

When a bid is made for a cash consideration, the bidding party must, in support of the bid, provide confirmations by (i) its board of directors, and (ii) one or more credit (or other) institutions with the necessary solvency (determinable by the regulatory authority with respect to public takeover bids, CySec), that the cash is and will remain available to such institution until the day of payment with respect to the bid. In the absence of such confirmations, CySec shall reject the takeover bid documents. The public offer documents are mandatorily submitted to the commission and the board of the offeree company, and will be made available to the holders of securities subject to the bid following securing the approval of the commission to publish the same, and is announced in at least two daily newspapers with national circulation.

There have been no major developments that necessitate anything other than the customary ongoing refinement of legal documentation.

Usury principles are contained in the Criminal Code, Chapter 154, (the “Criminal Code”) which prohibits the receiving, charging and/or collecting of interest at a higher rate than the interest rate ceiling during the provision of any loan period, except by credit institutions. The CBC must calculate the interest rate ceiling every three months, which is then published in the Official Gazette of the Republic of Cyprus.

Usury is punishable upon conviction with a fine not exceeding EUR30,000 and/or imprisonment not exceeding five years. Banking regulations also prohibit the charging of interest on interest (double counting) and general contractual principles render void/unenforceable provisions that are penalty clauses in disguise.

There are several disclosure requirements implemented in Cyprus, particularly in relation to financial transactions, tax matters, and financial reporting. These requirements are governed by various laws and regulations, which can be summarised as follows.

• Disclosure to regulatory authorities – if the transaction involves securities or derivatives, it may need to be reported to the Cyprus Securities and Exchange Commission (CySec), especially if it impacts market transparency or involves insider trading regulations.
• Tax-related disclosures – for transactions between related parties, proper documentation and disclosure are required under Cyprus’ transfer pricing rules. This ensures that transactions are conducted at arm’s length and are compliant with international tax standards.
• Anti-money laundering (AML) disclosure – entities such as banks, lawyers, and accountants must perform customer due diligence and report suspicious financial transactions to the Financial Intelligence Unit (FIU). They must disclose large or suspicious transactions that may indicate money laundering or terrorist financing activities.
• Disclosure of Cross-Border Financial Transactions (Directive 2018/822/EU also referred to as “DAC6”) – relates to disclosure in case of a cross-border arrangement which is indicative of tax avoidance.
• Common Reporting Standard (CRS) and FATCA.

Repayments of loans to the lender (whether located within or outside Cyprus, including interest repayments), would not be subject to Cyprus withholding tax deductions, as Cyprus does not levy withholding tax on such payments. At the same time, interest earned (eg, from deposits or a B2B arrangement) may be subject to either Special Defence Contribution tax (SDC) if passive income (at 30% from either a corporate or personal taxation perspective) or Income Tax (corporate stands at 12.5%; personal income tax varies depending on the tax bracket of the individual in question).

All agreements concerning property situated in Cyprus or involving things or acts to be done in Cyprus are subject to stamp duty, the maximum stamp duty payable on a single agreement (usually the loan agreement) being EUR20,000, with all ancillary agreements thereto (such as the security documents) being stamped at EUR2 each. The Commissioner for Stamp Duty has a discretion to exempt an agreement from stamp duty if the agreement is considered as referring to property which is not situated in Cyprus or is an ancillary agreement relating to transactions taking place outside of Cyprus, however, it is common practice for the Commissioner to impose stamp duty on security agreements if the chargor is located within Cyprus, irrespective of whether the loan facility agreement is entered into between a lender and a borrower, both of whom are incorporated and/or situated outside Cyprus. In such case, the loan facility agreement itself is not subject to stamp duty, however the security agreements are stamped with one applicable stamp duty, and the others if in relation to the same transaction at a fee of EUR2.

Registration of a charge which is registerable with the Cyprus Registrar of Companies is subject to a flat registration fee of EUR680.

Cyprus does not apply any withholding tax on interest paid to non-residents. Any interest received by local tax residents is subject to either Income Tax or SDC. There are no tax concerns for foreign lenders as there are no restrictions on payment of interest to parties in other jurisdictions, beyond perhaps a volume of activity that may amount to the creation of a (taxable) permanent establishment in Cyprus or if they carry on their lending activity through a fixed place of business within the Republic or via a special purpose vehicle (Cypriot company) in the Republic to undertake the specific loan activity.

There are no requirements to deduct or withhold tax from the proceeds of a claim under a guarantee or the proceeds of enforcing security.

Typically, the assets that are used as collateral to lenders are immovable property (real estate), tangible movable property (eg, goods, stock, equipment and ships), financial instruments such as shares, bonds, receivables, present or future cash and intellectual property. The security usually takes the form of an encumbrance or charge/pledge over the asset depending on its nature.

Where the security is financial collateral, no formalities exist under Section 90 of the Companies Law and the requirements contained in Section 138 of the Contract Law do not apply.

The formalities are outlined in more detail in 5.5 Other Restrictions.

Generally, no restrictions exist on the type of assets over which a security can be fixed unless it is a future asset, in which case any type of security can be granted (including a floating charge), besides a legal mortgage and a pledge. Likewise, any security can be fixed over interchangeable assets, besides a legal mortgage.

It is possible for corporate entities to provide downstream, upstream and cross-stream guarantees as long as the guarantee is in accordance with Section 53 of the Companies Law (financial assistance) and as long as they have the necessary corporate power to do so. Section 53 provides whitewash provisions regarding unlawful financial assistance of private companies. Specifically, the provision of direct or indirect financial assistance by a private company for acquisition of its own shares or of the shares of its holding company is not unlawful in cases where:

• such private company is not a subsidiary of any public company; and
• the relevant transaction is approved by the general meeting of the company by a resolution passed by a majority of 90% of all the issued shares of the company.

It is important to highlight that the general prohibition on the provision of financial assistance by a public company for acquisition of its own shares still exists.

Further, it is noted that the whitewash provisions do not affect the obligation to comply with any other legal obligations, such as when acting as a guarantor, the directors of a company owe a duty to their company to act in good faith for the benefit of the company. The company’s benefit from acting as a guarantor should be established.

See 5.3 Downstream, Upstream and Cross-Stream Guaranties.

Security

Charges (fixed or floating)

This is a common form of security taken over movable property. If the chargor is a Cyprus legal entity, then the charge must be registered with the Registrar of Companies (RoC) within the given statutory timeframe, on the prescribed ΗΕ24 form and accompanied by the relevant fee. If a charge is not registered appropriately, it will be invalid against a future liquidator of the legal entity chargor.

Liens

Liens can arise under common law or equitable principles with no formalities being observed, although a contract may explicitly provide for a lien.

Mortgages

Mortgages are a common form of security taken over property such as real estate, vessels and ships. The lender obtains a right in rem over the property. If a mortgage is not properly registered with the RoC within the time limit set out by the Companies Law, then the mortgage will be void against a liquidator or creditor of the mortgagor company.

Pledges

A pledge of shares of a Cypriot company is not registrable for perfection purposes. However, if a pledge has been taken over a foreign company’s shares by a Cypriot-registered company, then the pledge has to be registered as a charge with the RoC to be perfected and valid against a liquidator of the pledgor. In addition, a pledge can be created over any kind of movable property.

The formalities for a pledge of shares of a Cypriot company, in order to be valid and enforceable according to Section 138 of the Contract Law are:

• it must be in writing, signed by the pledgor and the pledgee, and have at least two witnesses;
• the pledgee must give notice of the pledge to the company whose shares are being pledged;
• a memorandum of the pledge has to be added in the members’ register of the company whose shares are being pledged; and
• the company must issue and deliver to the pledgee a certificate executed by the appropriate official of the company confirming the fact of the registration of the pledge in favour of the pledgee.

No formalities are applicable when a security is financial collateral, and the requirements contained in the Contract Law are not relevant.

Guarantee

Usually, a company offers guarantees as security for money owed on behalf of itself or a third party. In order for a company to grant a guarantee, it must have the adequate corporate power to do so and if it does not, the corporate guarantor must show that it will have a corporate benefit in giving the guarantee and that it serves its commercial and business interests. Furthermore, guarantees are usually formed by way of a written agreement and are bound to the contractual principles agreed between the parties themselves.

Security is usually released via an agreement between the relevant parties. If, however, security is registered as a charge under the Companies Law, then the RoC may release the security, either on whole or partial repayment of the secured debt. Filing the release with the RoC is a formality and it does not affect the validity of release.

Releasing a legal mortgage over immovable property occurs when the mortgagor and the mortgagee present the district lands office with the necessary documentation, according to the Transfer and Mortgages Law. In case a mortgagee does not release the mortgage, even after the discharge of secured obligations, then a court order to cancel the mortgage can be obtained by the mortgagor.

Procedures for the termination of a share pledge are specified in the pledge agreement and usually occur:

• when the secured obligations have been discharged in full;
• via written agreement of the pledgee and the pledgor;
• when the pledgee has served a termination notice on the pledgor; or
• when there has been enforcement of the pledge by the pledgee.

Following termination, the pledgee returns the pledge security documents to the pledgor and the secretary of the company whose shares were pledged is instructed to delete the memorandum of pledge against the pledged shares in the register of members.

Competing Security Interests

The priority of competing security interests is governed by the principles of common law. In general, priority is determined by the time of creation and the type of security interest created. For example, a fixed charge will have priority over a floating charge, and if the security interests are of the same kind (eg, two legal fixed charges) then the earlier security will take priority.

The rules of priority are subject to limitations arising from insolvency laws.

Subordination

Various methods of contractual subordination are used in Cyprus to determine which lenders are the first eligible ones to receive interest and repayments, and which ones have first claim over loan collateral. Generally, the “senior” lender has priority over any other “junior” lender, whose interest is thus “subordinated” and entitled to interest, repayment or the collateral only once the “senior” lender’s claim is satisfied in full.

Contractual subordination of debt is common in lending transactions and can be achieved by having a contractual agreement between the senior lender, junior lender and borrower.

Structural subordination is another method used to arrange the priority of debts. This is done by concentrating the senior debt in an active group company, with available assets, and directing the junior debt to the parent company.

Priority of shareholders

In the event of insolvency, these arrangements will remain effective subject to the mandatory pari passu principle that the priority of creditors on insolvency is determined by whether they are preferential, general or deferred creditors.

Care must be given in the drafting of such arrangements so that they do not run the risk of being considered ineffective if caught by the fraudulent preference provisions of the Companies Law.

Where the same security is provided to different classes of creditors, inter-creditor arrangements are also made between the lenders and the borrower company through an inter-creditor agreement that sets out the terms and conditions of their relationship.

The most common tools used by lenders to secure their interests arise by operation of Cyprus law that can prime a lender’s security interest, and typically include the following.

• Mortgage – a lender can establish a mortgage over immovable property, which provides it with a priority claim over the property in case of default.
• Pledge – a lender can secure its interest by taking a pledge over movable property, allowing it to have a priority claim over those assets.
• Floating charge – this allows a lender to secure its interest over a class of assets, which can change over time until an event of default occurs.
• Fixed charge – a lender can take a fixed charge over specific assets, ensuring their priority claim over those assets throughout the loan’s duration.
• Lien – is frequently taken over items that are being transported, and might be a common law legal lien or an equitable lien. The lien grants the holder simply the right to keep the debtor’s property until payment is made and does not include a right to sell. The carrier’s lien (the right to maintain custody of the goods) is subsequently discharged upon payment of the transportation fees.
• Guarantee – personal guarantees from third parties can be used to secure a lender’s interest and provide an additional layer of protection. Companies also commonly provide guarantees as security for money owed by themselves or a third party.
• Shareholding or management participation – is less common, but saw increased use post-2013, especially with non-performing clients as part of a restructuring, whereby a lender would take a shareholding or management interest or position (or both) in the underlying asset. This would normally by coupled with exit and sale provisions.

Generally, a secured lender will be in a position to enforce its collateral in the event that the borrower (and/or any other party providing securities for the loan facility arrangement) is in default of their obligations, as will be more specifically set out in the loan facility or security documents.

In the event of a charge and pledge over shares and share certificates, the pledge agreement secures – through pre-delivered title documents – enforcement under specified circumstances without the need for court recourse.

In the event of a floating charge, on a default event, the charge will become fixed and crystallise over the secured assets in accordance with the terms of the agreement, enabling the secured lender (or its administrator/receiver) to liquidate the securities in settlement of the amounts due to it. It is noted that in the event of the security provider undergoing a winding up procedure, in general, secured creditors by way of a fixed charge are entitled to enforce their security in settlement of their particular debt which the security provider has failed to pay, in accordance with the enforcement terms of the agreement or the document creating the charge. Floating charges, if not crystallised prior to the commencement of the liquidation or subject to the security documentation, rank for payment after liquidation costs and preferential payments, and before other unsecured creditors.

The Rome I Regulation (EC) No 593/2008 applies in Cyprus and sets out EU-wide rules for deciding the governing law to be applied to contracts in civil and commercial matters, when parties from more than one country are involved, regardless of domicile (Regulation (EU) No 1215/2012 (“Brussels Recast”). The parties to a contract are free to choose the governing law, and the applicable law can be amended, as long as all parties consent to it. Therefore, a choice of foreign law as the governing law of a contract in a security contract shall be recognised as long as it is made without duress and is not contrary to public policies of the Republic of Cyprus. However, when security is taken over immovable property in Cyprus, as well as a pledge of shares in a Cypriot company, domestic law will inevitably apply in order to be valid and enforceable.

Jurisdiction matters are administered by the Brussels Recast, which applies again only to civil and commercial matters. The only reason for a judgment passed in an EU member state not to be accepted, is its recognition being challenged, and for that reason, an assertion that such foreign judgment is enforceable is issued once the official and proper review of the related documents has been made.

Applicable and Foreign Jurisdictions

The applicable jurisdiction is usually the one where a defendant is domiciled, irrespective of nationality, and domicile is governed by that member state’s law where a matter is brought before its court.

Submission to a foreign jurisdiction would be upheld as long as the jurisdiction clause had been agreed between the contracting parties themselves and specified in the contract. Appearing in the proceedings or serving a defence would also be grounds for submission to a foreign jurisdiction. If a defendant does not want to submit to a specific jurisdiction, the defendant must not contest the case on its merits, they should acknowledge service stating that they intend to dispute the jurisdiction and make a declaration that the specific member state lacks jurisdiction.

The Cypriot courts do acknowledge and uphold state immunity, as long as such immunity is not consensually waived and a state is not acting in a private or commercial capacity.

Depending on the country of the foreign court, it is possible for a foreign judgment or arbitral award to be recognised and enforced in the Republic of Cyprus. In order for a judgment to be valid in Cyprus, it must go through the Cypriot courts’ registration system, in order to acquire the same status as a judgment from a national court.

Cyprus is party to various multilateral and bilateral international conventions with other countries, which is influential to the recognition and enforcement of foreign judgments. Different procedural mechanisms may be used to recognise and enforce a foreign judgment depending on the nationality of the court issuing the judgment or arbitral award. For example, Cyprus is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (the “NY Convention”) and although a judgment from New York would be recognised under the Recognition, Enforcement and Execution of Foreign Judgements Law (121(I)/2000), enforcement is not immediate. The law provides procedural requirements to be followed and ultimately sets a hearing where the respondent can object to matters concerning jurisdiction and substance.

When judgments or arbitral awards derive from an EU court, they will be recognised and enforced accordingly with the Brussels Regulation and the recognition under national law will be automatic. A judgment given by another EU member state court can be challenged in respect of its recognition under specific circumstances by the domestic courts, whereas it cannot be challenged in terms of substance. Therefore, Cypriot courts are not in a position to review the substance and/or merits of a judgment.

Aside from contractual restrictions specified in the security/loan agreements or specific debtor protection provisions (such as lending to homeowners for first homes), bankruptcy/insolvency may have an impact, as may any court proceedings initiated by other creditors.

The degree to which a lender’s rights of enforcement are affected upon the commencement of insolvency proceedings depends on the kind of security the lender has over the assets of the insolvent entity. Where relevant, a contract can set out insolvency as an event of default whereby termination and enforcement procedures can be triggered as set out in the contract.

If a winding-up order is made or a provisional liquidator has been selected, the (provisional) liquidator takes over all assets and things in action to which the company is or seems to be eligible.

A secured creditor ought to file with the official receiver, liquidator or guarantor, a preparatory valuation of the secured asset and reach agreement about the valuation. An independent valuer may be appointed if no agreement is reached regarding the value. The court may also impose a deadline by which all lenders must verify any debts or claims they may have. If the creditors’ debts are not evidenced, then they will be omitted from any distribution since the proof will set out whether the creditor is a secured or unsecured creditor.

Any distribution of the company’s property, which occurs after the beginning of winding-up by the court, is void, unless the court orders otherwise. Once a winding-up order is issued by the court and a provisional liquidator is selected, no further action or proceeding can be continued or commenced against the company, unless by leave of the court.

The priority ranking of creditors’ claims is determined by law and is as follows:

• the costs of the winding-up;
• preferential debts, ranking equally, which comprise:
1. all government and local taxes and duties due at the date of liquidation and having become due and payable within 12 months before that date and, in the case of assessed taxes, not exceeding one year’s assessment; and
2. all sums due to employees including wages, up to one year’s accrued holiday pay, deductions from wages (such as provident fund contributions) and compensation for injury (claims of employees who are shareholders or directors may not rank as preferential depending on the nature of the shareholding or directorship);
• secured creditors;
• unsecured creditors;
• sums due to members in respect of dividends declared but not paid; and
• any share capital of the company.

Before payments may be made to creditors with a lower priority ranking, claims in that ranking must be fully fulfilled. If the assets of the firm are inadequate to satisfy all creditors of a particular ranking, payments to such creditors are made on a pro rata basis.

The duration of typical insolvency processes in Cyprus can vary depending on the complexity of the case, the size of the company, and other relevant factors. Generally, insolvency proceedings in Cyprus could take anywhere from several months to a few years to complete.

Secured creditors and preferential creditors usually have a higher likelihood of recoveries closer to the value of their claims due to their priority in the repayment order. On the other hand, unsecured creditors might receive lesser amounts or nothing if the company’s assets are insufficient to cover all its debts.

Corporate reorganisations can take place according to the Companies Law, by way of compromises or arrangements, usually suggested between the company and either its creditors and/or its shareholders. A court application is therefore made either by the company, or any creditor or a shareholder, seeking a court order for a creditors’ or shareholders’ meeting subject to the voting requirements being met. The compromise or arrangement becomes binding to all persons involved, when the court approves the court order requested.

The examinership concept is aimed at a company when facing possible insolvency, as an attempt to prevent liquidation. With this, the intention is to appoint an examiner, whose duty will be to assess the rescue plan, while the company is placed under the court’s protection, and if the rescue plan accompanying the petition is considered viable, then the court will permit the commencement of “rescuing” the company. 

In order for the court to appoint an examiner, three conditions must be met:

• the company is, or most likely will be unable to pay its debts;
• no liquidation resolution for the company has been published in the Official Gazette of the Republic of Cyprus; and
• no court order has been issued for the liquidation of the company.

Furthermore, if the court is convinced that there is a plausible chance of the company enduring, with its entire or part of its business as a going concern, then it will issue an order for examinership. During that time, the company is “protected” and no court action can be taken against the company without specific court sanction.

Once a company goes into liquidation, any activity relating to property such as mortgage, charge, payments and so forth made up to six months prior to the commencement of the winding-up, could be considered as “fraudulent preference” and ultimately be set aside. This occurs when a creditor is given undue advantage over others and ends up having a better position than they would have, at a time when the company is not able to pay its debts. If found guilty, such creditors ought to pay back any benefit they obtained.

Where a transaction falls within the definition of a “financial collateral arrangement” under the Financial Collateral Arrangements Law (43(I)/2004), as amended (the “FCA Law”), such an arrangement is not automatically void based on the fact that a financial collateral agreement has been entered into or has been provided, within the timeframe of six months prior to the commencement of winding-up. If, however, such a transaction is considered to be a fraudulent preference of its creditors then it can still be set aside and in such a case the FCA Law should be interpreted on the basis of a bona fide person with no prior knowledge of any fraudulent dealings to defraud any creditors.

Furthermore, a floating charge created within 12 months of a company commencing wind-up procedures and which is currently in liquidation, will be void unless it is proved that the company was solvent after the creation of the charge. If a charge is not registered as per the requirements, the charge will be void against the liquidator and any creditor, but its validity will not have any interference with the chargor and the chargee.

Cyprus is a popular project finance location due to its favourable business climate and array of incentives for both domestic and foreign investors. Thus, once a project is located in Cyprus then it can be (and often is) financed via local institutions or institutions that have a local presence. The vast majority of lenders in Cyprus are credit and finance institutions that have been lawfully authorised by the Central Bank of Cyprus to conduct such credit activity.

The main recipients of project financing are infrastructure development, energy (particularly renewable energy projects), real estate and transportation.

Public-private partnership (PPP) transactions in Cyprus are constant. There is no finance specific PPP-enabling legislation currently in force but general public procurement laws and regulations, as well as specific legislation, apply depending on the field of operations.

Both international airports of the Republic of Cyprus are managed by an operator with a BOT concession. The operator is an international consortium, containing various local and international partners such as dominant French construction groups and international airport operators.

Undisputedly, PPP is crucial and of major significance to the Cypriot economy, something that has been demonstrated by the Cyprus National Reform Programme of the Presidency’s Unit for Administrative Reform, that mentioned that a certain PPP unit will be set up within the Public Works Department. Finally, since Cyprus is a member of the EU and stands in line with EU laws and regulations, it is deemed a free-market economy and there are thus practically no legal restrictions in contracting out certain services or utilities to private entities.

Current PPP Projects

The newly completed integrated casino resort “City of Dreams Mediterranean” in Limassol, is one of the biggest casino projects in Europe, being a consortium of international investors (Melco International) and local investors.

The discovery of natural gas around and in the vicinity of Cyprus has attracted the attention of multinational companies like Total, Exxon Mobil, Kogas, Qatar Petroleum and Eni which have started works for the extraction of the gas and to exploit potential oil deposits. Recent financing relates to the creation of an oil terminal and hydrocarbon-related infrastructure.

Requirements for PPP Projects

The Law on Fiscal Responsibility and Public Finances Framework (20(I)/2014), as amended, sets out the minimum public sector requirements when dealing with and handling PPP projects. The Law outlines what a “significant project” actually is (in cases where PPP is applicable), the assessment principles and other applicable specifications and tests that ought to be conducted by the public sector when assessing PPP offers.

In addition, The Law on Public Procurement (73(I)/2016), as amended, is the primary law on public procurement contracts in Cyprus. It effectively integrates the EU Procurement Directives 17/2004 and 18/2004 into domestic law, and handles the co-ordination of procedures for the award of public works contracts, public supply contracts, public service contracts and related matters.

The choice of law and dispute resolution mechanism for project documents can vary depending on the parties involved (including financing parties) and their preferences. Cyprus law allows parties to choose the governing law and jurisdiction of their contracts, making it possible to opt for laws other than Cypriot law and alternative dispute resolution methods. However, agreements on projects located in Cyprus will commonly be governed by local law.

It is permissible for international commercial contracts in Cyprus, especially those involving foreign parties, to use English law as the governing law. Additionally, international arbitration is often favoured as the dispute resolution mechanism, providing a neutral and efficient means to settle conflicts between parties.

There are no general restrictions on EU nationals owning real property in Cyprus. There are, however, some restrictions for non-EU nationals or companies.

A non-EU citizen or a company controlled by a non-EU citizen, foreign company or trust, the beneficiary of which is a non-EU citizen, cannot acquire real estate in Cyprus without prior permission from the Cypriot Council of Ministers (these powers are now vested in the relevant District Officers) under the Acquisition of Immovable Property (Aliens) Law, Chapter 109.

Cyprus generally does not impose restrictions on the security of foreign lenders holding or exercising remedial rights on liens on real property. Foreign lenders will be subject to the same laws and regulations as domestic lenders when it comes to providing loans secured by real property, subject to the above restrictions on ownership and need to comply with local legislation once the security is exercised.

When structuring a project finance deal, aside from the commercial elements, the key legal issues to consider include:

• asset ownership and corporate risks;
• authority/capacity of the counterparty to enter into the transaction;
• governmental or other authorisations or permits;
• financing structure; and
• security and collateral.

In terms of legal form, project vehicles are likely to take the form of a limited liability entity potentially coupled with either a shareholders’ agreement or a partnership at ownership level to allow for increased flexibility and discretion on decision-making.

Local rules and legislation may have an impact on the overall structuring beyond the customary employment, health and safety legislation (eg, the Safety and Health at Work Law of 1996 (89(Ι)/1996) such as the hydrocarbon exploration and exploitation activities in the Republic of Cyprus are governed by the Hydrocarbon (Prospection, Exploration and Exploitation) Law of 2007 (No 4(I)/2007) and the Hydrocarbon (Prospection, Exploration and Exploitation) Regulations of 2007 and 2009 (No 51/2007 and No 113/2009).

Finally, in view of the ESG drive, relevant factors should also be considered, especially for projects in the energy sector.

Most project finance in Cyprus takes the form of either equity (capital) finance or bank finance (or a combination of both). A few examples of export credit agency financings are the following.

• Bank financing – traditional bank loans or credit lines are one of the most common sources of project financing. Banks may provide loans directly to the project company or participate in syndicated loans with other financial institutions.
• Private equity (capital) funding – private equity (either own or from third parties) provides equity capital to the project in exchange for ownership stakes.
• Export credit agency (ECA) finance – refers to transactions in which representatives of specific nations grant financial assistance to the export of qualifying capital goods and related services from their home jurisdiction. ECA finance is a type of trade credit that benefits both exporters and foreign purchasers.

The following may be used, but this is seldom the case in Cyprus:

• Project bonds – project bonds are debt securities issued by the project company to raise funds for the project. Institutional investors can engage in infrastructure projects using project bonds, as they are listed, tradable instruments that can provide higher risk-adjusted returns.
• Alternative sources of financing:
1. streaming or royalty financing – is a type of alternative financing arrangement commonly used in the mining and natural resources industries. In this financing model, a company provides upfront capital to a mining or resource-extraction project in exchange for the right to receive a portion of the project’s future production or revenue; and
2. commodity trader financing – is a subset of commodity finance that refers to the financing of the underlying commodity exchange from supplier to buyer and is linked to the asset conversion cycle.

Different legislation is set in place for each type of natural resource existing in Cyprus and depending on the industry of the project, various and/or different licences may be required prior to commencing any actual work.

Traditionally, mining activities were dominant in Cyprus and a licence to carry out such activities would be required by the Mining Service of Cyprus, for any exploration and exploitation of minerals as per the Mines and Quarries Law Chapter 270, as amended. A more recent example is the discovery of hydrocarbons in the region of Cyprus, which prompted the Hydrocarbon (Prospection, Exploration and Exploitation) Laws of 2007 to 2019. The EU Directive has been incorporated into Cypriot law, specifying the conditions for approving and authorising the prospection, exploration and production of hydrocarbons. Any successful licensee will be required to enter into an Exploration and Production Sharing Contract (EPSC), with the Ministry of Energy, Commerce, Industry and Tourism, as the relevant authority and ultimately share their revenues with the Republic of Cyprus.

The EPSC obliges the contractor to comply with the applicable tax laws and regulations of Cyprus and the EU, as a 5% withholding tax on gross income derived from within Cyprus is charged. However, in contrast, no exact tax regime is applicable in relation to oil and gas companies operating in Cyprus.

Furthermore, any grade-scale construction projects such as the construction of marinas, golf courses and/or hotel resorts, will require an assessment of the building procedures and environmental impact, as they may have a harmful impact on the environment. In such cases, the Town and Country Planning Law (90/1972), as amended, and the more recent Law on the Estimation of Repercussions on the Environment for Specific Construction Work, specify the requirements for the issuing of certain licences related to town planning and restrictions on foreign entities which are eligible to apply for such licences.

There is no legislation specific to project financing. However, aside from general legislation, such as the Safety and Health at Work Laws (89(I)/1996), as amended, depending on the specific industry there may be further regulations regarding the operations and safety requirements specific to that sector – eg, in order to protect the worker and the environment in natural resource projects, the Safety and Health at Work (Safety of Offshore Oil and Gas Operations) Regulations of 2015 (P.I. 424/2015) have been introduced under the Safety and Health at Work Laws of 1996 to (No 2) of 2015 (the “Regulations”). The Regulations lay down minimum requirements for the prevention of major accidents during offshore oil and gas operations and the mitigation of the consequences of such accidents.

In addition, the Law on Environmental Liability with regard to the Prevention and Remedying of Environmental Damage (189(I)/2007), as amended, renders any natural or legal, private or public person who operates or controls the occupational activity or to whom decisive economic power over the technical functioning of such an activity has been delegated by law, (including the holder of a permit or authorisation for such an activity or the person registering or notifying such an activity) liable for environmental damage caused. According to the law, strict liability is imposed upon the operator, for charges of prevention and remediation of environmental damage caused by any of its registered “occupational activities”. This incorporates “any activity carried out in the course of an economic activity or an undertaking, irrespectively of its private or public, profit or non-profit character”.

The competent authority for Cyprus is the Environmental Authority of the Ministry for Agriculture, Natural Resources and Environment. A lender financing a project or a guarantor providing security for a project, is not liable under environmental legislation unless it is deemed to be an operator.